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New market pattern and forecast of cotton and cotton yarn industry chain
!!Zheng Shengwei, CCFGroup

2019-06-14 16:36:52

Zheng Shengwei¨s report was separated by four parts: 
First part, current status and problems of cotton textile industry 

Cotton, yarn and fabric industry chain inventory status 
1. Finished product stocks piled up high, feedstock inventory low 
2. Continuously lowering yarn and fabric O/R, to record low in recent years 
3. Slipping consumption affects chemical staple fiber and chemical filament yarn 
4. Under high finished product stocks, prices of yarn and fabric drop more quickly, and prices of cotton and cotton yarn decline deeply in May-Jun. Except for OEC10S and OEC21S, all domestic cotton yarns suffer losses in spot production profit. The more cotton days in inventory, the greater the losses. 
5. Imported yarn profit rapidly turns negative, price falls in line with domestic yarn. Spot one is 1,000yuan/mt lower than forward one. imported yarn 32S price advantage is vanishing. 
6. Stock piles up with sales slow in Apr-May, Pakistan yarn sales condition is better than India yarn. 

Macro environment and consumption. 
1. CLI leading indicator shows that economic growth keeps slowing down in China, Europe and US (lower than 100), and slightly moves up in China 
2. Global CRB index, China Wenhua Commodity Index indicate weak consolidation of commodity market
Key words of macro environment: weak peripheral economy, holding Sino-US trade war, and China new tax reform policy 

Part two, downstream consumption and export situation 
1. Residents' disposable income and expenditure growth slows 
2. Domestic sales of textile and apparel slows and inventory accumulates 
3. Textile export slows and apparel export declines 
4. Textile and apparel exports trend vary by country 
In 2016-Apr 2019, China textile and apparel export flows increased by 3.48% in India, 2.17% in Indonesia, 0.84% in the Philippines, 26.54% in Hong Kong, 12.13% in the Federation of Erros, 6.45% in Japan, 5.24% in Europe, 5.28% in the United States and 5.15% in Vietnam. 

In conclusion, the consumption of semi-finished products and finished products slows down, and inventory accumulation in intermediate links accelerates. Continuously impacted by fast fashion, apparel market of traditional brand is in the period of consumption downturn, while products with high cost performance have outstanding competitive advantages. The growth rate of online sales slows down. Affected by fluctuation of regional consumption, new retail and sales increased by web celebrity, etc., fast fashion is accelerating. 

Part three, competitiveness of China's textile and apparel industry 
1. Global spun yarn capacity distribution 
China has the largest spun yarn capacity, followed by India. It is expected that China¨s lagged spun yarn capacity returns to be eliminated by normal capacity after 2019. 
2. Changes and growth rate of China¨s spun yarn capacity 
The top 3 of global cotton yarn exporters are India, Vietnam and Pakistan, and the largest importer is China 
3. The relation between cotton prices at home and abroad and cotton yarn imports 
The spread between cotton prices at home and abroad is a key factor affecting import yarn demand, but it has not been a decisive factor in recent years. Corresponding affecting factors have been more complicated, including establishing factories in foreign countries and financing. 
4. The supply-demand structure of China¨s textile fiber and global market advantages 
Non-cotton fiber has strong competitiveness in China with high proportion of capacity and production, and it is also competitive in international market, supporting integrity determine the irreplaceability of some products, and the status quo of higher export growth rate of textile compared with that of apparel is likely to last for many years.  
5. Globalization of China¨s textile and apparel accelerates 
Textile is the core industry to China, but not the pillar industry. Company¨s layout in international market accelerates obviously. From being encouraged by the government to being forced by the cost, then to attract investment and finally to be led by the procurer. In the second half of 2018, the transfer of orders for brand apparel accelerated due to political and exchange rate reasons. 
6. Demand from Europe, the US and Japan for China¨s textile and apparel 
In the first quarter of 2019, growth rate of China textile and apparel imports from the EU, the United States and Japan declined year-on-year, and their share also dropped. 
7. The impacts of the US imposing an additional $300 billion USD tariff and alternative country options 
The impact of tariffs on $300 billion of Chinese goods is great, the expectation is partly digested by the market. But transfer of orders is impelled by China-US trade war. The impact of tariff of $300 billion worth of goods on Chinese textile and apparel is far greater than that of tariff of $250 billion. 

Part four, supply, demand, and price forecast 
In Apr, demand reduced fast while supply was sufficient, therefore, inventory piled up in Apr-May and sell-off emerged in early Jun. Historically, inventory usually did not amass in the second quarter. If the reduction in inventory is limited, spinning mills may have to cut operating rate further. In terms of cotton yarn supply and demand, the situation was similar to that in 2015. 

Under the economic growth slow-down of global major economies, including China, and weak commodity prices, the Sino-US trade pattern is still to be unfavorable, then overall consumption is expected to go downturn. The extreme influences of Sino-US trade war are highly probable to be settled, while commodity, cotton and cotton yarn prices still have downward space. Once the policy is confirmed, some outstanding orders will be negotiated to be solved, then sales may see periodical improvement. In the meantime, exchange rate is likely to be depreciated further. It is with small probability that some framework agreement may be reached within the year, and the additional tariffs will not be levied and the bilateral trade recovers, then demand will be released, and orders may recover, amid optimism in economy and improvement of mindset. Then, pay attention to the economy recovery. 

One thing to note: Currently, spinners and weavers face low feedstock and high product inventory. If there is no good expectation, O/R will move down largely, and cotton and cotton yarn consumption will continue to shrink. Then with ample supply of cotton, market sentiment will be more fragile. On the contrary, if trade disputes or a number of policies boost demand or confidence, it is expected that the market will improve quickly. However, the former condition is with higher probability. 
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